Advancing Sustainability in Banking: Opportunities, Challenges, and Key Drivers of Transition

In this evolving context, what strategic measures should Vietnamese banks adopt to uphold ESG commitments while safeguarding operational efficiency?

In brief

• Vietnam needs US$330–370 billion for green growth by 2050, creating strong demand for sustainable finance and green credit portfolios. 

• Banks face profitability pressure as green loans often have lower interest rates while funding costs remain unchanged, lowering margins. 

• Regulatory gaps and limited eligible green projects hinder lending, despite rising ESG requirements and global sustainability commitments.

Net Zero Banking Alliance (NZBA) – a global initiative supported by United Nations to promote green finance – announced its suspension of operations on 3 October, following a wave of withdrawals from a series of large banks. This event not only shocked the international financial community but also raised questions about the feasibility of sustainability commitments in practice. In this evolving context, what strategic measures should Vietnamese banks adopt to uphold ESG commitments while safeguarding operational efficiency?

As we accompany banks on their journey to integrate Environmental, Social, and Governance (ESG) principles into core operations, developing a green, sustainable and responsible financial system, contributing to realizing the Government's commitment at COP26 to achieve Net Zero ambition by 2050, we have observed, in our role as consultants, that each organization has very different ambitions and ways of achieving sustainability goals. Some banks adopt a top-down strategy on a broad scale, addressing material aspects across all ESG components. Others view ESG primarily as an opportunity to enhance brand reputation through selective initiatives, such as reducing operational emissions and engaging in community-based environmental and social activities. Certain institutions prioritize establishing a foundation to attract green and sustainable capital from both domestic and international sources. Despite differences in objectives and starting points, every bank encounters distinct opportunities and challenges throughout the implementation process.

Motivation for green transition

Amid the global momentum toward sustainability, Vietnam has affirmed its commitment through the National Strategy on Green Growth for the period 2021–2030, vision to 2050, with a Net Zero target by 2050. Achieving this ambition will require substantial financial resources estimated at $US330–370 billion, spanning sectors such as energy, construction, agriculture, and other material industries. For the period up to 2030, total capital demand is projected at $US86.8 billion, of which approximately $US65.1 billion is expected from foreign sources, while the remainder will be mobilized from the state budget, commercial loans, and private investment1.

The demand for sustainable finance comes not only from national strategies but also from the proactive efforts of enterprises, especially of listed companies, multinational corporations, and export-oriented businesses. These organizations increasingly integrate ESG principles into their strategies to meet the expectations of investors and international partners, thereby driving the development of products such as green loans, green bonds, convertible credit facilities, and other innovative financing instruments.

Moreover, ESG standards are increasingly becoming mandatory, particularly for export-oriented enterprises. For instance, the EU Carbon Border Adjustment Mechanism (CBAM) requires full transparency regarding carbon emissions across the production chain. These regulatory challenges have driven a sharp rise in investment demand for clean technologies and renewable energy, creating an urgent need for green capital. This shift presents a significant opportunity for banks to expand their green credit portfolios while assuming a strategic advisory role to support businesses on their sustainability journey.

Obstacles on the path toward sustainability  

Although sustainability has emerged as a dominant trend and an essential requirement for most Vietnamese banks, its practical implementation, particularly the development of green credit portfolios and the reallocation of assets toward emissions reduction, remains a significant challenge.

1. Internal challenges

The challenge of balancing financial returns: Implementing sustainability initiatives requires banks to make substantial investments in their internal green transformation. These include engaging consulting firms for the design and installation of emission-reduction technologies at headquarters and branches; developing comprehensive ESG risk management frameworks; enhancing staff capabilities in ESG practices; and upgrading information technology systems to measure carbon emissions. Additionally, banks must develop or modernize data management systems to monitor and supervise green loans, ensuring accurate reporting and performance evaluation in line with international standards.

In addition, banks also face a significant challenge in maintaining profitability while expanding green credit portfolios. In Vietnam, financial institutions often offer green and transition loans at interest rates lower than conventional loans to incentivize adoption. For example, several major banks have introduced credit packages of up to VND10,000 billion with interest rate reductions of up to 1% per annum. Another bank has applied reductions ranging from 0.5% to 1.5% annually for the clean agriculture sector. However, the cost of capital for green lending, whether through green bond issuance or borrowing from international organizations, remains unchanged, compressing profit margins. Furthermore, efforts to reduce financed emissions require banks to restrict lending to high-emission industries, adversely impacting net interest income, particularly amid slowing credit growth. As a result, some banks prioritize ‘development’ over ‘sustainability’ when structuring credit portfolios to ensure short-term financial performance.

The challenge of aligning cash flow for green and transition loans: Many green loans, such as financing renewable energy projects like solar and offshore wind power under the Government’s Power Development Plan VIII, typically require long tenors of 15 to 20 years to align with the lifecycle of renewable energy assets and ease repayment pressure during the initial phase. However, the current funding structure of banks relies primarily on customer deposits, which account for 70–80% of total mobilized capital and are predominantly short-term in nature2. Beyond maturity mismatches, renewable energy projects demand substantial upfront investment, necessitating banks to commit stable long-term capital to ensure project progress and implementation efficiency. Yet, long-term funding channels from financial markets, carbon credit mechanisms, and green investment funds remain nascent or lack synchronized implementation, placing considerable pressure on the banking system to secure medium- and long-term funding sources.

Shortage of specialized human resources: Another significant challenge lies in the shortage of personnel with deep expertise in sustainability. Currently, many banks have yet to define clear directions, objectives, and roadmaps for implementing sustainability, and therefore have not identified the required competencies or developed corresponding recruitment and training plans. The skill set—encompassing both theoretical knowledge and practical application—necessary for banks to effectively execute sustainability initiatives includes: (1) Understanding fundamental concepts and relevant Vietnamese and international regulations on sustainability; (2) Knowledge of climate science, international agreements, legal frameworks on climate change, and global and national Net Zero commitments; (3) Familiarity with green taxonomy and sustainable finance, including trends and specific regulations for major emitting industries; (4) Ability to calculate and manage financed and operational emission; ((5) Knowledge of carbon markets; (6) ESG risk management expertise;(7) Proficiency in sustainability-related information disclosure;and (8) Awareness of other social and governance-related aspects.

1. Market Challenges

Vietnam regulatory frameworks have yet to fully meet market expectations, and there are currently no mandatory policies incentivizing green development. In contrast, several countries in the region, such as Singapore, Thailand, Malaysia, and Indonesia—have introduced standards and guidelines for integrating environmental considerations into commercial banking operations, encompassing business strategies, risk management, and organizational structures. These nations have also implemented policies and programs to encourage the expansion of green lending portfolios. For example, Singapore’s Enterprise Financing Scheme – Green (EFS-Green) shares up to 70% of lending risk with participating financial institutions to mitigate credit risk. In Vietnam, apart from Circular 17/2022/TT-NHNN, which provides guidance on managing environmental risks in credit activities and foreign bank branches, there are no legal requirements mandating banks to adopt ESG frameworks. Implementation remains largely voluntary, with minimal compliance pressure and no clear incentive mechanisms from the Government for the banking sector.

Moreover, prior to July 2025 when Decision No. 21/2025/QD-TTg (Decision 21) on environmental criteria and verification of investment projects under Vietnam’s green taxonomy takes effect, many banks faced difficulties in determining what qualifies as a green project for lending purposes. Additionally, regulations governing the carbon market, renewable energy certificate market, and other related mechanisms have not been established in a timely manner, hindering the development of green projects in renewable energy, agriculture, forestry, and other key sectors.

Limited Availability of Eligible Green Projects for Lending: For commercial banks, green projects must satisfy stringent criteria to qualify for financing. These include classification as ‘green,’ supported by comprehensive documentation verifying their environmental attributes, while simultaneously meeting credit requirements set by the State Bank and each bank’s internal policies. Additionally, projects must demonstrate the feasibility of capital utilization plans, repayment capacity, and compliance with collateral requirements for secured loans.

Currently, many green loan applications fail to meet all these criteria. For instance, in renewable energy projects, establishing the environmental purpose is generally straightforward; however, proving feasibility and timely repayment capability remains a complex challenge for both lenders and borrowers. Such projects typically involve substantial capital outlays, extended timelines, and heightened risks—particularly regarding marketability of outputs. Similarly, in the agricultural sector, assessing repayment capacity and debt recovery through cash flows from clean agricultural production is difficult, as lending for sustainable agricultural value chains still requires time to mature.

Moreover, the level of market development and the scale of capital demand present additional challenges for banks seeking to expand their green lending portfolios. For instance, in the construction sector, although the National Green Growth Strategy for 2021–2030, with a vision to 2050, promotes the development of green buildings utilizing energy-efficient and environmentally friendly materials, the actual number of such buildings remains limited. Despite rapid growth in recent years, 163 new green buildings were recorded in 2024, more than double the figure in 2023 and three times that of 2022, they still represent only a small fraction of total annual construction projects.

The Dissolution of the Net Zero Banking Alliance (NZBA): On October 3, 2025, the Net Zero Banking Alliance (NZBA), a global initiative supported by the United Nations, announced the suspension of its operations following a wave of withdrawals by major international banks. This development has sent shockwaves through the global financial community, including Vietnam, and underscores the growing challenges in sustaining climate commitments. It also raises critical questions regarding the long-term viability of green finance initiatives. Many Vietnamese banks are now questioning whether this reflects a temporary trend driven by geopolitical and economic fluctuations or whether sustainability, including sustainable finance, remains an irreversible trajectory.

Although banks face numerous challenges on their journey toward sustainability, it is crucial to acknowledge that sustainability is not optional but an enduring strategic imperative. It is far more than a passing trend, it represents a vital pathway for long-term resilience and growth. In an environment marked by escalating climate risks, policy volatility, and rising societal expectations, sustainability serves as a protective shield against present and future disruptions. To navigate these complexities effectively, banks must define clear objectives, establish comprehensive roadmaps, and implement appropriate organizational structures with well-defined responsibilities, while simultaneously strengthening green credit portfolios and building robust ESG foundations encompassing risk management, data integrity, and transparency in disclosures. 

Above all, strong and consistent commitment from senior leadership is indispensable, as leaders play a guiding role in ensuring top-down integration of ESG principles across all aspects of business operations—from strategic planning to practical execution—thereby laying the groundwork for harmonizing growth, profitability, and environmental responsibility in pursuit of long-term sustainable success.

This article was first published in Vietnam Investment Review on 17 December 2025